There is wide agreement that a carbon tax (or cap)[i] is an essential policy in the effort to combat climate change. Pairing the tax with a dividend is warranted on grounds of justice and political feasibility. A carbon tax and dividend can also be seen as a step toward a basic income. The dividend, like a basic income, is universal and not conditional on a means test or work requirement. Although not sufficient for basic needs, it can be large enough to make a significant dent in poverty and inequality. It is more likely to be implemented in the medium term than a full basic income. However, as a step toward a full basic income, a carbon dividend is not without some difficulties. This blogpost will be focused on the United States, but many of the points should be adaptable to other contexts.
The reason for a carbon tax is to discourage use of fossil fuel, by raising the price steadily, until consumers shift to renewable forms of energy. But like most consumption taxes, a carbon tax is regressive. Lower-income households spend less on energy per capita, but a higher percentage of household income on energy. A carbon dividend is one way to rectify the regressivity of the tax. If all the revenue is returned in dividends to residents, a majority of households will experience a net financial benefit.[ii] Compared to other uses of the revenue, such as government spending or tax benefits, the dividend is both universal and transparent.
The economic benefit and transparency of the dividend also contribute to its political feasibility. Particularly in a country where there is hostility toward taxes, a revenue-neutral dividend can sustain support for a tax that will need to rise steadily for decades.
If the dividend were very small, it would not make sense to focus on it as a meaningful step toward a basic income. However, a carbon tax adequate for keeping global temperature rises from exceeding 2 degrees Celsius will support a dividend equal to or exceeding Alaska’s Permanent Fund Dividend (US$2,072 in 2015, $1,022 in 2016). For example, the carbon fee and dividend proposal favored by Citizens’ Climate Lobby (CCL) starts at $15 per metric ton of CO2-equivalent emissions, assessed at the mine, well, or port of entry. It rises by $10 per year, or at whatever rate the Department of Energy determines will bring emissions to 10 percent of 1990 emissions by 2050. All revenue (minus a small administrative cost) is returned as dividends (full for adults and half for children under 18, with a maximum of 2 child dividends per household). A majority of households will benefit. If instituted in 2015, the annual dividend for a family of four would rise to $3,456 in 2025 and $4,752 in 2035, according to CCL.
Other estimates suggest even higher dividends. Using the calculator at the Carbon Tax Center, I modelled a similar carbon tax and dividend, starting at $10 per ton, rising by $10 per year, with equal per capita dividends, and counting a household as 2.6 persons. In 2025, the individual dividend would be $1,557, and household dividend would be $5,721. In 2039, the last year available in the model, the dividends would be $3,289 and $8,551 respectively.
In either estimate, the dividend is significant, and can be expected to have a positive effect on poverty and inequality. If Alaska’s Permanent Fund Dividend deserves to be regarded as a partial basic income, then so too should a carbon dividend over a significant number of years.
A carbon tax is not on the immediate political agenda in the US, but there is growing support for it. Legislation has been introduced in the Congress. A bipartisan caucus is exploring climate policies. CCL has 418 active chapters around the world, with a concentration in the US regularly lobbying every member of Congress. And a group of prominent (mostly Republican) elder statesmen, the Climate Leadership Council, has proposed a tax and dividend package that could achieve the same ends as Obama’s Clean Power Plan. But even if the tax comes to pass, there are competing claims that would have to be addressed before most or all of the revenue could take the form of a dividend.
Firstly, labour. Many unions will favor green investments over universal dividends. For those employed in such projects, the wages can be expected to greatly exceed the per capita dividend. Moreover, a transition to a green economy will displace many workers in traditional carbon-based industries such as coal mining, and the support of these workers for carbon pricing may depend on adequate support for their transition to alternative employment.
Secondly, the urgency of green investment. For independent reasons, there may be a good case for green investment in order to speed the transition to a carbon-free economy.
Thirdly, consistent with the Kyoto Treaty and the more recent Paris accord, it will be necessary to support transition in developing countries toward a carbon free economy – and there will be political pressure to use the proceeds of carbon pricing for this purpose.
Finally, all politics is local – or so it is said to be in the US. What this often means is that support for policies is won a congressional district at a time, by offering specific benefits to the district, which the representative can claim to have delivered. This is one reason why majority support for policies in national opinion polls does not translate into majority support in the Congress. Spending projects are more visible than a universal dividend. The Waxman-Markey bill is an example of this kind of legislation, with many insider deals and giveaways to electricity utilities having taken place to win support for the bill.[iii] Of course, that bill failed to pass the Senate. Perhaps the politics of grassroots movements can succeed where “inside the Beltway” politics has failed.
It is possible to divert some of the revenue to one or more of these competing interests. Boyce and Riddle, evaluating a cap and dividend proposal with similar revenue, argue that if 75% of the revenue were returned as per capita dividends, 70 percent of the population would still receive a net benefit.[iv] Some of these competing interests can be addressed by setting aside some of the revenue from carbon pricing for other purposes, but the net positive financial effects of a carbon dividend for a majority may be threatened when the percentage of such set-asides exceeds 25 percent.
There are two concerns about carbon fees and dividends that are specific to the question of whether they constitute a step toward a basic income.
First, a carbon dividend by design will fade away. As the price of carbon rises, demand will fall. Eventually, the declining demand effect will surpass the rising price effect, and the dividend will begin to decline. The policy is driven primarily by the environmental problem, and the dividend is one use of the revenue, motivated by considerations of justice and political feasibility. (In fact, it is conceivable that if the dividend were to become more important than the environmental tax that funds it, it could lead to perverse efforts to reduce the environmental impact in order to prolong and maximise the dividend. It would be useful to see some modelling of this possibility.) Once the environmental problem is solved, there is no longer a compelling reason to provide a dividend. Thus, viewed as a basic income, a carbon dividend is only a temporary fix.
Advocates can argue that the experience of a partial basic income will lay the groundwork for a permanent one, to be funded from other sources as the carbon dividend declines. This could take the form of a resource dividend funded from taxes on other permanent or renewable resources, such as land, water, the electromagnetic spectrum, seigniorage, or technology.[v] Or it could be refashioned as a basic income funded from income or wealth taxes. The former would be a more natural extension of the resource dividend concept. But it is unlikely to produce more than what Barnes calls a “base income”, less than a full basic income.[vi]
This leads to another worry about a carbon dividend as a step toward a full basic income: path dependency. Would the introduction of a basic income in the form of a resource dividend box in the basic income movement, making it difficult to reframe a resource dividend as a basic income that should be expanded by income taxation? Is it unrealistic to think that a country could be convinced to support a carbon dividend, and then persuaded to rethink what that means in a way that permits expansion of the basic income? I am not aware of any momentum in Alaska to expand the dividend, particularly for the purpose of the more egalitarian ends usually associated with a full basic income. It may be possible to overcome the path dependency from the resource dividend frame, but the danger suggests that basic income advocates have a long-term educational challenge reframing the dividend as a basic income. And in the meantime, work for a carbon tax and dividend, worth instituting for independent reasons, may be hindered if it is framed as a step toward a more controversial full basic income. There may be no good solution to this dilemma – but a heightened awareness of it might contribute to more nuanced politics.
[i] An alternative to a carbon tax is a carbon cap. The tax sets a price, in order to reduce consumption. The cap policy sets a limit on consumption, and auctions emission permits up to the level of the cap. In some schemes permits can also be traded. There are environmental, economic, and policy reasons for and against each policy, which need not concern us here. With a view to the same environmental result, these policies should produce similar amounts of revenue, which can then be distributed as a dividend, or used for other purposes. See Michael W. Howard (2012) “A Cap on Carbon and a Basic Income: A Defensible Combination in the United States?” In: Karl Widerquist and Michael W. Howard, Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World. New York: Palgrave Macmillan: 147—162; Michael W. Howard (2016) “Building Support for U.S. Climate Reforms with Universal Benefits”, SSN Forum on Building Democratic Support for Equitable Carbon Pricing, March, http://www.scholarsstrategynetwork.org/page/building-support-us-climate-reforms-universal-benefits; James K. Boyce (2016), “The Challenge of Forging Sustainable Climate Policy”, SSN Forum on Building Democratic Support for Equitable Carbon Pricing, March. http://www.scholarsstrategynetwork.org/page/challenge-forging-sustainable-climate-policy
[ii] James K. Boyce and Matthew E. Riddle (2010) “CLEAR Economics: State Level Impacts of the Carbon Limits and Energy for America’s Renewal Act on Family Incomes and Jobs.” Political Economy Research Institute. https://www.peri.umass.edu/fileadmin/pdf/other_publication_types/green_economics/CLEAR_Economics.pdf
[iii] Theda Skocpol (2013) “Naming the Problem: What It Will Take to Counter Extremism and Engage Americans in the Fight against Global Warming.” Symposium on the Politics of America’s Fight against Global Warming. Harvard University. http://www.scholarsstrategynetwork.org/sites/default/files/skocpol_captrade_report_january_2013_0.pdf
[iv] Boyce and Riddle (2010).
[v] Peter Barnes (2014) With Liberty and Dividends for All. San Francisco: Berrett-Koehler.
[vi] Peter Barnes (2016) “Can Basic Income Come to America?” Medium. http://peter-barnes.org/article/can-basic-income-come-america/; for a more optimistic assessment of the potential size of resource dividends, see Gary Flomenhaft (2012) “Applying the Alaska Model in a Resource-Poor State: The Example of Vermont.” In: Karl Widerquist and Michael W. Howard, Exporting the Alaska Model: Adapting the Permanent Fund Dividend for Reform around the World. New York: Palgrave Macmillan: 85—107.